Bank assets, liquidity and credit cycles
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Bank assets, liquidity and credit cycles. / Lubello, Federico ; Petrella, Ivan; Santoro, Emiliano.
I: Journal of Economic Dynamics and Control, Bind 105, 08.2019, s. 265-282.Publikation: Bidrag til tidsskrift › Tidsskriftartikel › Forskning › fagfællebedømt
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TY - JOUR
T1 - Bank assets, liquidity and credit cycles
AU - Lubello, Federico
AU - Petrella, Ivan
AU - Santoro, Emiliano
PY - 2019/8
Y1 - 2019/8
N2 - We study how bank collateral assets and their pledgeability affect the amplitude of credit cycles. To this end, we develop a tractable model where bankers intermediate funds between savers and borrowers. If bankers default, savers acquire the right to liquidate bankers’ assets. However, due to the vertically integrated structure of our credit economy, savers anticipate that liquidating financial assets (i.e., loans) is conditional on borrowers being solvent on their debt obligations. This friction limits the collateralization of bankers’ financial assets beyond that of real assets (i.e., capital). In this context, increasing the pledgeability of financial assets eases more credit and reduces the spread between the loan and the deposit rate, thus attenuating capital misallocation as it typically emerges in credit economies à la Kiyotaki and Moore (1997). We uncover a close connection between the collateralization of bank loans, macroeconomic amplification and the degree of procyclicality of bank leverage.
AB - We study how bank collateral assets and their pledgeability affect the amplitude of credit cycles. To this end, we develop a tractable model where bankers intermediate funds between savers and borrowers. If bankers default, savers acquire the right to liquidate bankers’ assets. However, due to the vertically integrated structure of our credit economy, savers anticipate that liquidating financial assets (i.e., loans) is conditional on borrowers being solvent on their debt obligations. This friction limits the collateralization of bankers’ financial assets beyond that of real assets (i.e., capital). In this context, increasing the pledgeability of financial assets eases more credit and reduces the spread between the loan and the deposit rate, thus attenuating capital misallocation as it typically emerges in credit economies à la Kiyotaki and Moore (1997). We uncover a close connection between the collateralization of bank loans, macroeconomic amplification and the degree of procyclicality of bank leverage.
KW - Faculty of Social Sciences
KW - Banking
KW - Bank collateral
KW - Liquidity
KW - Capital misallocation
KW - Macroprudential policy
U2 - 10.1016/j.jedc.2019.06.003
DO - 10.1016/j.jedc.2019.06.003
M3 - Journal article
VL - 105
SP - 265
EP - 282
JO - Journal of Economic Dynamics and Control
JF - Journal of Economic Dynamics and Control
SN - 0165-1889
ER -
ID: 222970463